Key Takeaways
- REITs offer an affordable way to invest in real estate, starting with as little as $1,000, and provide liquidity similar to stocks.
- Real estate investment groups allow investors to own property units without the burden of property management duties.
- Managing rental properties requires significant capital, typically needing $100,000 or more, along with time and effort.
- Home-sharing platforms have boosted the trend of buying second homes for rental income purposes.
- Investors should weigh the potential requirement of private mortgage insurance when putting less than 20% down on a property.
There are many reasons to invest in real estate, from rental income to portfolio diversification. Real estate investing involves purchasing properties to earn rental income, capital appreciation, or both. It can be a stable investment in times of stock market volatility.
There are three cost-effective entry options into real estate investing: REITs, real estate investment groups (REIGs), and direct property rental. Real estate crowdfunding could be an alternative as well. We’ll break down how much money is needed to start in real estate, covering both low and high-cost options.
Affordable Real Estate Investment with REITs: From $1,000
First created in the 1960s to allow individual investors to participate in the commercial real estate market, the real estate investment trust (REIT) is one of the cheapest and easiest options (for as little as $1,000 depending on the type of REIT) for adding real estate to a portfolio.
These are securities and are traded on major exchanges like stocks. They invest in real estate directly, either through property purchases or through mortgage investments. Many REITs specialize in a particular type of real estate or a specific region.
A REIT offers the investor a relatively high dividend as well as a highly liquid method of investing in real estate. Most real estate investments are not easy or quick to get out of. An exchange-traded REIT is.
Moreover, you can start small with a little bit of cash. If you’re in it for the long term, consider one of the REITs that offer a dividend reinvestment plan (DRIP).
Mid-Range Real Estate Investing with REIGs: From $5,000
For investors seeking to own physical real estate instead of shares of a company, a real estate investment group (REIG) or private partnership may be for you.
The REIG allows an individual investor to buy one or more units of living space within an apartment or condo building through an operating company. The operating company collectively manages all of the units and takes care of marketing them. In exchange, the operating company takes a percentage of the monthly rent.
An REIG represents a relatively cost-effective way to enter the real estate market as an investor. It also takes the management work off of your hands.
Some real estate investment partnerships accept an investment of $5,000 to $50,000. That’s not enough to purchase a unit, but the partnership will pool money from several investors to fund a shared and co-owned property.
The goal is to find a REIG that will provide a monthly cash return on your investment.
Important
You might look for a REIT that has a dividend reinvestment option for greater long-term growth.
Traditional Rental Property Investment: Starting at $100,000
The tried and true way of investing in real estate is also the most expensive and time-consuming: becoming a landlord. We’re all familiar with the basic idea. An investor buys a residential or commercial property and rents it out to a tenant. The owner is responsible for paying the mortgage, taxes, and maintenance costs. Ideally, the rent will cover the costs and maybe, over time, provide income or capital growth, or both.
There are plenty of costs because the concept of a mortgage without proof of income went out with the credit crisis of 2007-2008. Depending on the seller and the lender, you may need as much as 20% down (with less you may be required to put down private mortgage insurance), plus closing costs and other fees. If you decide to purchase a fixer-upper, you may need to take out a construction or renovation loan to get the property in rentable condition.
The amount of money you need to purchase a rental property depends on a wide variety of factors about the building itself, including but not limited to, type and size of the building, where it is located, how much work it needs, and the list goes on. In Oklahoma, you can buy a fixer-upper for less than $50,000 (as of December 2021), but you are out of luck, most likely, if you are searching for a house in that price range in Boston.
When you own a rental property, whether it is one home or an entire apartment building, you should have a cash reserve to cope with emergency repairs and occupancy gaps, as well.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a qualified financial professional to determine a suitable investment strategy.